Purchase of Aurizon (ASX: AZJ)

20th June 2023

Across the Australian equity component of investor accounts, we have bought Aurizon (ASX: AZJ), Australia’s largest rail freight operator.

Aurizon operates locomotives that haul bulk & coal freight from Australian mines to various container and export terminals. Bulk freight focuses on transporting future facing commodities such as lithium, nickel, copper & cobalt. Aurizon’s key assets also include two nationally significant rail networks: the Central Queensland Coal Network (CQCN) and the South Australia and Northen Territory Network, together these assets provide more than 5,100 kilometers of rail track.

We are attracted to Aurizon for the following reasons:
Robust income generation
Protection against inflation with customer contracts
Earnings stability from its network assets
The exposure the business provides to future facing commodities

Aurizon has three key levers for value creation that we would like to highlight:

The first is Aurizon’s pivot to bulk freight and the exposure they will have to future facing commodities produced in Australia. The transition to clean energy technologies including electric vehicles, battery storage and renewable energy generation will drive the demand for future commodities. Aurizon’s bulk business will be exposed to structural tailwinds as the energy transition occurs and drives demand for bulk freight solutions.
The second is the initial ramp-up their bulk freight business. Aurizon recently acquired One Rail Australia, providing them with bulk freight capacity through bulk locomotives and a rail network. The ramp-up is successfully underway with the signing of a cornerstone contract with TGE. We expect the business to deliver strong earnings growth as Aurizon fills its freight capacity and gains operating leverage.
The third is the potential for Aurizon to achieve higher contract utilization across its coal haulage business. Over the last couple of years Aurizon has had an unfortunate run with wet weather and abnormal track derailments. A normalization in operating conditions could see Aurizon increase utilization of contracts and deliver higher volumes that will provide a boost to earnings.

We are aware of the risks posed by Aurizon when it comes to the longevity of its coal assets such as the CQCN and coal locomotives in the face of increasing ESG scrutiny. In-line with Elston’s approach to sustainable investing and our fiduciary duty to maximize the risk-return trade-off for clients, Aurizon has undergone extensive due diligence that covers the materiality of both ESG and non-ESG business risks, and we believe Aurizon provides an attractive risk-return profile. Aurizon’s recent TGE contract win has provided us with confidence that they can manage the risk of their business transformation and validates their continued investment in bulk freight capacity.

The purchase of AZJ has been funded through the de-weighting of several portfolio holdings.

As always, thank you for your ongoing support, it is very much appreciated. If you have any questions or would like more information, please contact your adviser.

Warnings and disclosures

This material has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained in this material is General Advice and does not take into account any person’s individual investment objectives, financial situation or needs. Before making an investment decision based on this advice you should consider whether it is appropriate to your particular circumstances, alternatively seek professional advice. Where the General Advice relates to the acquisition or possible acquisition of a financial product, you should obtain a Product Disclosure Statement (“PDS”) relating to the product and consider the PDS before making any decision about whether to acquire the product. You will find further details of the service we provide and any cost to you within the Financial Services Guide. Any references to past investment performance are not an indication of future investment returns. Prepared by EP Financial Service Pty Ltd ABN 52 130 772 495 AFSL 325 252 (“Elston”). Although every effort has been made to verify the accuracy of the information contained in this material, Elston, its officers, representatives, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this material or any loss or damage suffered by any person directly or indirectly through relying on this information.